Morgan Stanley Coffee Report March 2, 2016

A supportive macro environment left coffee in the dust as the day went on, with notable underperformance visible across a range of ags.  From 8:30 NY time onward coffee traded a tight penny and a half range before closing nearly unchanged.  Spread volume was around 11k, while outright volume was reflective of the relative lack of volatility during the session.  Focus amongst much of the industry was on recently passed US Congressional Act HR 244, and signed into low as the Trade Facilitation and Trade Enforcement Act of 2015.  While multiple news agencies have referred to an impending ban on the import of specific origins of coffee, it remains to be seen which countries, if any, will ultimately be affected, how the funding will be provided, and what the enforcement will entail.  Multiple commentators have pointed to a Department of Labor list of countries which are accused of child labor abuses, yet these are countries of concern, not banned trading partners.  It seems unlikely a blanket provision can cover an entire nations production.  Likewise, definitions are unclear of what precisely “child labor” entails.  The WTO has deferred from the topic, while US code is riddled with nuance in domestic definitions.  US code, which should not apply in overseas trade, including 29 USC §203(5)(l) and §212, has particular definitions of & restrictions on oppressive child labor which are too long to quote here, along with being inappropriate for a coffee broker.  With murky definitions, CBP & C-TPAT enforcement responsibility, funding from a general budget, bilateral and free trade agreements with holding terms in place (NAALC perhaps?), and a challenging environment with regards to which coffee could be affected, there are myriad complications to the humble coffee trader.  We suggest anyone with concerns consult their legal counsel, and assume many have already.  Perhaps more urgent would be the potential changes in import duties on custom clearances that are noted in the same statute.  These are complicated topics and government action is always a concern to the market.  The spec community which has long pressured coffee does not seem concerned about any of the code which we have mentioned above, as noted by the market performance.  With certs continuing to decline, perhaps that will eventually become persuasive as has been long awaited.